Sunday, August 07, 2011

I was most curious as one of the Chinese listed stocks finally offered some decent dividends.

Maxwell International Holdings announced the following on 5th Aug 2011: First and Final Dividend. It's a First and Final Single Tier Exempt Dividend of RM0.0335 per share (Note, there are some folks who are rather picky with dates of announcements etc etc, Maxwell actually made an announcement declaring it was proposing this dividend back on 19th May 2011 (see here )

And since Maxwell last traded at 0.34 sen, I decided to look for more info.

Maxwell was the first foreign listed IPO this year and sadly there was undersubscription for its shares offered ( See Edge artice: Maxwell’s public issue undersubscribed.). Perhaps the local investors could not stomach yet another shoe company listing from China. ( Sorry but I was told that 'shoe' is not too a happening word in Cantonese )

And the share performance since listing was dismal.

Now, as we are all well aware, many of the Chinese listed companies trades at a fairly low PE and they have tons of cash. ( In Singapore, some S-Chips have traded at a PE of less than ONE and yes, there was one S-Chip with a PE of less than ONE who was later caught with the financial accounting fraud. )

For me, I could only think of one safer approach, which is to look at the cash flow and look at the interest income.

Think about it.

Here's the simple reasoning.
Say I tell you I have 200 million cash. But my interest income shows me getting a very low return for my money. Say less than one percent.

Think about it... if you have 200 million cash, would you be satisfied if your banker gives you less than one percent for your money? Logically yo wouldn't, yes?

So if I tell you I have 200 million but my interest income doesn't support such a fact... surely you would ask me a simple question : SURE BOH?

Yes?

Agree?

Surely you would be sceptical with my claims. Yes?

Let's look at Maxwell's piggy bank cash.

Very impressive, yes?

172 million worth of cash!!! That's a lot of cash, yes???????

Then I look at Maxwell's cash flow statement.

For the six months ending 30th June, Maxwell's interest income only show some 363,901 .

Err.... errr...

6 months only 363,901.

One year, it should be about 727,000.

Ok.. round it up... that's about an interest income of 730 thousand only.

Compare the cash... Maxwell says it has some 172 million. Ok... perhaps it's understandable that the company doesn't bank in everything into money markets. Agree?

Say Maxwell banks in 100 million into FDs?

Agreeable?

But look at the returns... it's only 730 thousand.

Do the math. 730 thousand divided by 100 million = .....how many percent.... ?

How?

Err... I am not insinuating anything... all I am saying is... I believe Maxwell is getting extremely low returns for its cash. Why? I don't know. But if you are an interested investor, don't you want to know why?

ps: I seriously don't know if Maxwell would go up or down... so please spare me with those auntie talks.

Another red flag about this list is that rumors of fraud swirl around many of the companies. China-Biotics (CHBT), Universal Travel, China Sky One Medical (CSKI), and other troubled companies have been the subject of fraud rumors in addition the having low interest earnings. Many of the listed companies also filed numerous amendments to their quarterly and annual reports to correct mistakes, and they made many late filings with the SEC as well.

The low interest earned means that one of two things is true for these companies. Either the companies do not actually have the amount of cash that they report on their balance sheet, or management is incredibly incompetent and has specifically sought out the worst possible places that pay the lowest possible rates on deposits, including finding financial institutions outside the United States or China that pay lower rates than either country.

Regardless of which is true, why would someone invest in such a company? You are either a partner with a business that cannot file accurate financial statements (for whatever reason) or one that is run by incompetent management that cannot properly manage a cash balance.

For investors seeking a great undervalued company, there are about 11,000 public companies traded in the United States. Investors would be wise to avoid the 16 companies I listed in the table above. Instead, try the many high quality large cap US companies trading at historically low multiples. Why not invest in low priced companies where you know the product, know that the internal controls over finance and accounting work, and know financial statements can be filed on time? More importantly, why not invest where you know management is honest?